New Research Shows Greater Focus on Technology and Analytics, Adding
Value and Revenue Growth; Comes at Significant Cost, Creating Barriers
of Entry for New Players

October 15, 2014 08:05 AM Eastern Daylight Time

NEW YORK & LONDON--(BUSINESS WIRE)--Future Commission Merchants (FCMs) have significant concerns about the
future of the market. Those that offer over-the-counter (OTC) clearing
services have told TABB Group that they are at a crossroads because fees
and volumes have disappointed, given the additional complexity of OTC
contracts versus the equivalent in futures.

According to TABB, the standard fee structure has moved from straight
transaction and maintenance fees to incorporate the additional margin
required for OTC contracts. “As many as 54% of the FCM firms,” says
Khasawneh, “have now added a basis point fee for initial margin
requirements. Beyond that, there’s little consensus concerning which
part of the fee structure contributes the most to revenues and as a
result the revenue outlook remains murky. However, although several FCMs
indicated their businesses were profitable on a standalone basis,
individual views about the overall state of the market were more
negative.”

On a more positive note, Jenkins explains there is an increased focus on
technology and analytics, specifically collateral and margin management,
that bodes well for future profitability. “Despite the challenges faced
in the OTC market in general and by FCMs specifically, it is clear that
the focus of innovation is still on front-end technology platforms – 75%
say they’re using clearing as a way for clients to enter their platform
– rather than further tinkering with fees or margin services. This will
impact headcount over the next two years.” He adds that analytics and
portfolio optimization are seen as key profit growth centers by those
FCMs that clear in size, and that as much as 55% of their annual spend
is invested in new technology, an amount seen as a barrier of entry for
new firms establishing themselves as an FCM.

The report’s
results are drawn from second quarter 2014 interviews with 13 FCMs
operating in the global OTC markets, firms that according to the
Commodities Futures Trading Commission (CFTC) in June 2014 represented
$15.5 billion in client funds held for swaps trades, accounting for
50.5% of the total market.

Based in New York and London, TABB
Group is the research and consulting firm focused exclusively on
capital markets, based on the interview-based, “first-person knowledge”
research methodology developed by Larry Tabb.